Washington Business Management*

OBJECTIVES

Upon completion of this section, the student should be able to:

• Describe How a "Business Purpose" is Determined.
• Describe How a "Service Business" Differs From Other Types of Businesses.
• Identify Various Affiliated Service Providers and Describe How They Support a Service Business.
• Describe and Compare the Following Methods of Business Operations:
  • Centralized vs. Franchised 
  • Single vs. Multi-Site Operations
• Describe How to Create a Market Analysis for a Service Business.
• Develop a market strategy plan for a service business.
• Analyze and evaluate needed support services.

HOW A “BUSINESS PURPOSE” IS DETERMINED

A “Business Purpose” is created out of a need for a product or service. If a company feels that it can produce a product or provide a service and realize some profitability, then a business is born.

To determine the business purpose, consider the following:

1. Who will your business serve?

2. Why are you going into business?

3. What unique personal strengths do you have?

4. What are the unique strengths of your proposed business?

5. What unique personal weaknesses exist?

6. What are the weaknesses of your proposed business?

7. What is the ultimate objective of your business?

8. Do you have the right people for critical positions in your proposed business?

With laws like the Statute of Frauds, environmental concerns and new classifications of residential dwellings (condominiums, cooperatives and timeshares) real estate has become more complicated than a century ago. Centuries ago, real estate was often transacted with a handshake. In the real estate industry of today, buyers and sellers are often in need of the service of a real estate broker. As a result of this need, we have real estate brokerages and real estate brokers.

The purpose of a business should be stated in a mission statement. This mission statement can change over time as a firm adds or deletes certain services or products.

THE MISSION STATEMENT INTRODUCTION

Every organization needs to define its fundamental purpose. The mission statement clarifies the essence of an organization's existence, its philosophy and values.

The mission statement provides the basis for judging the success of the organization and its programs. A powerful mission statement could attract donors and volunteers. It helps the organization and its stakeholders to determine whether the organization is doing its job and making the right decisions. It provides direction when the organization needs to adapt to new policies, helps the board to stay true to its primary purpose, and serves as a benchmark for decision making in times of conflict.

CHARACTERISTICS OF A MISSION STATEMENT

A mission statement should be clear, concise, motivational, informative, operational, inspirational, and clearly state the purpose, philosophy and values of the organization.

SAMPLE MISSION STATEMENT

"To be the best, full-service Real Estate Company in Centerville. The best interests of our clients will always come first and we will place the clients' concerns ahead of our own in every transaction. For each client, we will work as hard as we can to help them achieve their goals. We believe that working hard at something you love to do, with people you trust, is one of the greatest experiences in life."

HOW A "SERVICE" BUSINESS DIFFERS FROM OTHER TYPES OF BUSINESSES

In a service business, the people that you serve are most important. This form of business involves many types of labor services related to business functions. The aspects of a service business are intangible.

In a service business, the consumer wants and expects the best service.

Service includes knowledge, expertise, competence, advice, willingness, respect, care, and concern for the consumer.

A real estate brokerage is a good example of such a business. The broker and agents do not "sell" houses. Only the owner can actually sell the home. However, the broker sells their services to effectively market and promote the sale of the property or procure a buyer. The service extends beyond simply matching a buyer and a seller. It involves all of the other services involved in a real estate transaction prior to closing.

Examples of a service business include the following:

1. Real estate brokerages and real estate professionals.

2. Groundskeeper.

3. Doctor or nurse.

4. Hairstylist.

In a manufacturing business, the product becomes the main focus of a business. They produce goods or products for purchase from the consumer. When a consumer purchases something that is manufactured, they can touch it, see it and it is tangible.

Examples of a manufacturing business would be:

1. A mill that manufactures timber from trees.

2. A bakery that produces bread.

3. A manufacturing plant that produces widgets.

4. An automobile manufacturer.

In a distribution business, the product is received from the manufacturer and distributed to a business or directly to the consumer.

In general, the physical business space needed to supply a service business is far less than the requirements needed by a manufacturing or distribution business. Some of the reasons for this are:

1. Manufacturers often have large automated factories to produce their products and store their semi-processed and finished goods.

2. Distributors usually require large warehouses to store their products before the actual distribution.

NOTE: Some businesses can be both manufacturing and service-oriented. An example might be a restaurant that manufactures its own baked goods and also sells those goods on its restaurant menu.

Affiliated Service Providers

A real estate brokerage is a strong example of a service type business, which is very dependent on affiliated businesses. The brokerage's reputation depends on service, so it's crucial that they work with the best affiliates. One of the biggest benefits of working with affiliated businesses is referral business.

During the real estate transaction, many different entities will have a part in the successful sale of the property and in providing settlement services. These affiliates play a significant role in supporting service businesses such as those in the real estate industry.

According to the Real Estate Settlement and Procedures Act (RESPA), some of these providers are as follows:

• Real estate brokers

• Lenders

• Credit reporting agencies

• Appraisers

• Attorneys

• Title companies and title representatives

• Escrow companies

• Home warranty companies

• Home and pest inspectors

• Inspectors specializing in environmental issues such as mold and radon

• Comprehensive Loss Underwriting Exchange (CLUE)

• Insurance companies

Following are other providers that do not fall under RESPA but play an important role in the real estate industry:

• Moving companies

• Gardeners

• Painters

• Home improvement contractors

An issue arises when the referring company, usually the lender, and the provider have an affiliate business relationship, meaning both companies have some type of business link or common ownership. For example, a parent company owns both the lending company and the appraisal company.

Unfortunately, unscrupulous companies may use these affiliate relationships to collect additional fees from an unsuspecting home buyers. For example, if a lender has an appraisal subsidiary and then refers a home buyer to that appraiser and charges an additional fee for the appraisal service, the lender also benefits from the referral. Lenders may discourage buyers from seeking other, less costly appraisers to ensure additional income for themselves. If the home buyers are unaware of the relationship between the lender and the appraiser, they may not know about the mutual benefits between the companies.

RESPA sets up certain rules on how these referrals are handled to protect consumers from shady business practices and to let fully informed buyers regarding these relationships pursue other providers if necessary. Following are some key things you will need to keep in mind.

When the referring entity makes a referral to an entity with which the referring entity has a business affiliation, an Affiliated Business Arrangement (AfBA) disclosure is required to be given to the home buyer in advance of the referral being made.

• If a lender has an appraisal service as a subsidiary of the parent company, this is considered an affiliated business arrangement.

• If a lender recommends an appraiser but does not have any business or financial link to the appraiser, this is not considered an affiliated business arrangement.

The home buyer is not required to use a preferred provider, unless that provider is representing the interests of the referring entity, such as a lawyer or a credit reporting agency. In this situation, the referring party will be responsible for paying the fee of the provider.

No one in the transaction can receive a fee, kickback, or anything of value in exchange for the referral, whether affiliated or unaffiliated. No one can split a fee or receive unearned fees for services not actually performed. Any violation of the anti-kickback, referral fees and unearned fees rules of RESPA can lead to both criminal and civil penalties. Persons who violate these rules can be imprisoned for up to one year and fined up to $10,000 for each incident and may be liable for civil damages up to three times the amount of the charge paid for the service.

Affiliate Relationship Disclosure

The AfBA disclosure informs the purchaser of the exact nature of the affiliation between the referring party and the provider being referred. This disclosure is only required when a settlement service provider refers the home buyer to a provider with whom the referring party has an ownership or other beneficial interest. The disclosure must be given to the home buyer at or prior to the time of referral.

RESPA Restrictions Regarding Compensation

Section 8 of the RESPA regulations state:

"(a) No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.

"(b) No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed." 12 USC 2607(a) and(b)"

RESPA allows companies to charge fees for actual services performed, such as attorney's fees, title search fees, appraisal fees, and so on, along with fees for mortgage brokers and real estate brokers.

The challenge is in determining what a "fee" is and what a "kickback" or "thing of value" is. 

Three main criteria determine whether there is a violation:

• The payment or giving of a thing of value, which can include cash, gifts, special considerations, significant discounts, etc.

• The payment must be required or expected in order for the referral to be made.

• The referral must actually occur. A referral means that a homebuyer is directed to use a specific provider for which the service will be paid for by the home buyer as a settlement service.

Promotional and Educational Activities

Settlement service providers, such as mortgage bankers, mortgage brokers, title insurance companies, and title agents, can provide normal promotional and educational activities under RESPA. These services and activities cannot be in lieu of services they would normally have to pay for and cannot be tied to referrals in any way.

Potential Penalties When Violating Compensation Rules

Violations of RESPA compensation rules can result in very severe penalties:

• Criminal prosecution

  • $10,000 fine per incident

  • Prison terms up to one year per incident

• Civil liability penalties up to three times the fee charged for the settlement service.